Working Paper: NBER ID: w13912
Authors: Lance J. Lochner; Alexander Mongenaranjo
Abstract: This paper studies the nature and impact of credit constraints in the market for human capital. We derive endogenous constraints from the design of government student loan programs and from the limited repayment incentives in private lending markets. These constraints imply cross-sectional patterns for schooling, ability, and family income that are consistent with U.S. data. This contrasts with the standard exogenous constraint model, which predicts a counterfactual negative ability -- schooling relationship for low-income youth. We show that the rising empirical importance of familial wealth and income in determining college attendance (Belley and Lochner 2007) is consistent with increasingly binding credit constraints in the face of rising tuition costs and returns to schooling. Our framework also explains the recent increase in private credit for college as a market response to the rising returns to school.
Keywords: credit constraints; human capital; student loans; education; family income
JEL Codes: H81; I22; I28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| family income (D31) | college attendance (I23) |
| government student loan programs and private lending (H81) | credit constraints (E51) |
| credit constraints (E51) | human capital investment (J24) |
| family income (D31) | credit constraints (E51) |
| private lending (G21) | credit constraints (E51) |
| credit constraints (E51) | college attendance (I23) |